IMF Concludes Fourth ECF Review Mission to Kenya

Press Release No. 12/361
September 25, 2012

An International Monetary Fund (IMF) mission, led by Mr. Domenico Fanizza, visited Nairobi from September 12-25, 2012 to carry out the fourth review under the three-year Extended Credit Facility (ECF) arrangement approved in January 2011. The members of the mission met with Minister for Finance Hon. Robinson N. Githae; Professor Njuguna Ndung’u, Governor of the Central Bank of Kenya (CBK); other senior government officials, and representatives of the private sector, civil society and development partners. The team wishes to thank the authorities for their warm hospitality and the high quality of the discussions.

At the conclusion of the visit, Mr. Fanizza issued the following statement:

“Kenya’s economy continues to do well in a challenging global economic environment. Agricultural production and domestic power generation have benefitted from normal weather conditions, reducing the country’s vulnerability to expensive oil and food imports. Tight monetary policy has brought inflation down in line with the authorities 5 percent target. With a gradual easing of monetary policy in the coming months, economic growth is set to accelerate. The external position has strengthened, with rising international reserves and a current account deficit set to shrink as growth in domestic demand has been brought in line with that of domestic output.

“Macroeconomic policies have been in line with the program during the first half of 2012. Fiscal discipline was maintained in the face of spending pressures and revenue shortfalls, and public debt has started to decline as a consequence. Following its success in taming inflation, the central bank has already started to ease its stance consistent with improved inflationary expectations. Key structural reforms have progressed, including with the adoption of the Treasury Single Account in the recently enacted Public Financial Management Law.

“Looking ahead, economic prospects for 2012 and 2013 remain favorable. In particular, continued regional integration, further trade diversification to new markets, and a pick-up in investment flows will allow Gross Domestic Product (GDP) growth to exceed 5 percent in both years amid improved private sector confidence. Political stability in the run up to the March 2013 general elections and a smooth transition to devolved government at the county level will play a key role in ensuring that these objectives are met. Nevertheless, there is little scope for complacency. The weakened global outlook and the still unfolding Euro zone crisis pose threats for Kenya’s favorable economic performance. Thus, policies should continue to enhance Kenya’s economic resilience to ensure a sustained and stronger economic expansion, a necessary condition to reduce poverty.

The CBK’s monetary policy stance that aims at cementing low inflation expectations while exploiting the scope for further gradual easing. In a context of high international food prices, particular attention will need to be paid to emerging inflationary risks

The CBK’s continued commitment to its floating exchange rate regime. A further gradual accumulation of international reserves will also enhance confidence.

The authorities’ intention to restrain spending and enhance revenue performance to allow the primary fiscal deficit to narrow and the public debt-to-GDP ratio to decline further. Recent revenue shortfalls should be reversed through more pro-active VAT audits and strengthened verification procedures. Within the budgetary envelope, the authorities plan to focus on investments in infrastructure, education, and the expansion of social safety nets. On the structural front, we support the authorities’ intention to implement both the VAT law following Parliament approval and the Treasury Single Account at the national level.

The CBK’s intention to strengthen banking supervision through new prudential regulations and the establishment of supervisory colleges for banking groups. Deepening of the financial sector will be supported by ongoing efforts to list small and medium-sized companies on the stock exchange and to establish a Futures and a Commodities Exchange. We also urge rapid adoption of the Combating the Financing of Terrorism Bill and implementing regulations for the Proceeds of Crime and Money Laundering Act, which will enhance Nairobi’s status as a regional hub for financial services.

"IMF Executive Board consideration of the fourth program review under the ECF arrangement is tentatively scheduled for October 2012. Upon approval the IMF would disburse the fourth tranche of the loan for an amount of about US$110 million, bringing total disbursement under the arrangement to SDR 344.67 million (about US$535 million).”

The Executive Board originally approved Kenya’s three-year ECF arrangement in January 2011 in an amount equivalent to SDR 325.68 million (about US$505 million), and in December 2011 approved an increase in access to an amount equivalent to SDR 488.52 million (about US$755 million—see Press Releases No. 11/22 and No. 11/457).